The Case for Paying Employees a Living Wage

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For human resource professionals, compensation is one of the most important considerations they will make. The wage that businesses decide to pay employees impacts not only the health of the organization, but it also has rippling societal effects. In recent decades, increased attention has been paid by the public to the level of compensation paid to employees at the bottom of the pay scale. The debate has forced employers to consider the question: should businesses pay their employees a living wage? Critics of the living wage assert that while paying employees at all levels of an organization might hold good intentions, it is largely a detrimental practice. By paying wages above those reflected by the market, employers needlessly increase their payroll costs, which forces them to make cuts that are detrimental to the workforce, such as decreasing hiring or raising the cost of their products. Yet, proponents of a living wage argue that businesses should adopt the living wage because it raises the morale of employees, benefits the overall economy, and is the ethical thing to do. I think that proponents of the living wage make the most compelling case, supporting both the economic and ethical merits of the living wage through their arguments.

Overview of the Living Wage Movement

Before addressing the case for and against the living wage, it is helpful to gain a clear understanding of what constitutes a “living wage.” Because the standard for a wage that one can live off is subjective and can vary from person to person, this term can easily become ambiguous. Today, the concept of the living wage is mostly defined by social and political activists who a broader movement to increase living standards for workers, especially the working poor. The living wage movement is a recent phenomenon that seeks payment for employees that is adjusted to the cost of living. In their article on the living wage movement in the journal Working USA, David Reynolds and Jen Kern establish that living wage activists commonly accept that the standards for a living wage should be calculated by determining the minimum level of pay that a family of four would need to live at the poverty line (Reynolds and Kern 17). By evaluating both federal and local poverty line figures, advocates assert that a wage can be set that enables workers to meet their basic living costs.

Further Reynolds and Kern highlight the means through which activists have attempted to influence the wages paid to workers. As they note, living wage advocates have traditionally used legislative channels to promote the living wage by supporting ballot initiatives or ordinances that mandate employees within a state or specific municipality to pay wages above a specified threshold (Reynolds and Kern 17). This tactic is of interest to employers because it reveals a potential threat posed by the living wage movement. If employers do not adjust the wages they pay to a level that the public deems equitable, an alternative could emerge where government intervention forces businesses to pay employees above what they deem reasonable. Thus, the living wage debate challenges human resource professionals to think critically about whether there is an obligation to pay low-skill or low-wage employees above the minimum wage to meet the demands of the public.

Criticisms of the Living Wage Movement

Because of the traction it has gained, the living wage movement has been the target of criticism from businesses and academics alike. Several academic studies have maintained that paying a living wage to low-skill employees would impose burdens upon employers that would ultimately be detrimental to job seekers and the economy. While many supporters of the living wage hold the view that wealthy companies could easily afford to increase the wages of their employees by a few dollars, research counters this assumption. Evaluating the impact of living wage policies on large retail chains, the University of California at Berkley presented a study determining that if Wal-Mart were to adopt a living wage of $12 per hour, it would result in a $3.21 billion increase in payroll costs per year (Jacobs, Graham-Squire, and Luce 5). To put this figure into perspective, the increase would be equivalent to 11.1 percent of the company’s current payroll for hourly employees (5). Further, the researchers determined that if Wal-Mart were to compensate for this loss by increasing prices, it would cost the average consumer an added $43.95 per shopping trip or $1,187 per year to compensate for the wage increases (6). As these figures demonstrate, even seemingly small changes to wages can add up for large-scale employers.

In addition to leading to price increases for the consumer, enacting a living wage is believed to have a negative impact on segments of the labor force. According to the research of Faraj Abdulahad and Hany S. Guirguis in “The Living Wage and the Effects of Real Minimum Wage on Part-Time and Teen Employment,” a 10 percent increase in the minimum wage in studies localities led to a decrease in employment of those who are already disadvantaged in the labor force (Abdulahad and Guiguis 5). Among the groups that saw a reduction in their employment rates were female teenagers, African American teenagers, and part-time employees (5). A primary concern presented by this research is that increasing the minimum wage prices workers from these demographic groups out of the market. Because employees are not able to start an employee out at a low wage and test his or her performance before increasing his or her wage, the employee might decide not to hire individuals with marginal attachments to the labor force at all.

Additionally, the field of macroeconomics contributes to the discussion by assessing the role of government in setting wages. When the government sets a minimum price that must be paid for labor or a product, this is widely defined as a price floor in the field of economics. The living wage constitutes a price floor because it sets a minimum wage that a company can match or exceed but cannot go under. As economists Robert Schuldt, Davis Woodall, and Walter E. Block assert in their report “Drowning the Poor in Excessive Wages: The Problems of Minimum Wage Law,” every industry has a market rate, which reflects the aggregate value of a specific service that laborers can provide (Schuldt, Woodall, and Block 259). Through an evaluation of economic literature and research, the economists determine that companies should pay employees at the market rate because it reflects the productivity of employees and thus reflects the true value of the labor they provide (259). From this perspective, low wages merely reflect the true value that employees bring to both the economy and the company.

The argument for paying employees a market rate is significant because it also holds normative implications. For those who support the living wage, there is an assumption in their arguments that employers are somehow neglecting their obligation to ensure the living standards of their employees. However, if the market rate reflects the value of labor, it could be argued that it is only fair to pay employees according to the value that they create for both their employers and the economy. For example, many would note that it is fair to pay an individual who has spent the time and money to complete medical school more money for their labor than an individual who failed to complete school and thus sought work as a janitor. Just as many would argue that there should be no limit on what an enterprising and productive individual should make, it can be argued that there should be no limit on what employers should pay individuals who do not provide as much value to their business. Thus, while the market rate argument is often dressed in the trappings of rational economic philosophy, it can also be understood as a profound moral argument for enabling market mechanisms to set the wages of laborers.

In addition to affirming the inherent fairness of the market rate for labor, Schuldt, Woodall and Block assert that minimum wage results in decreased economic opportunities for all members of the labor force. As they note, economic literature confirms that increases to the minimum wage negatively impact the ability of employees to hire more workers in all functional areas of their business (259). To consider how this scenario can occur, consider a retail chain that hires cashiers and administrative professionals in its district office. If the minimum wage laws require this employer to increase wages to their cashiers, the employee might seek to reduce the number of cashiers that are hired. However, if the employer can’t make sacrifices in the front-line functions of the business, he or she might have to cut a salaried position to compensate for the cost of increasing hourly wages. When this action happens at a wide scale, even white-collar workers can be negatively impacted by wage increases that are intended to target low-wage workers.

To summarize the perspective of those against enacting a living wage, an extensive body of research supports the notion that requiring employers to raise their wages leads to detrimental effects on the entire economy. Businesses must absorb the increases to their payroll costs or pass the costs on to consumers through higher prices. Employees who are marginally attached to the workforce might find their job opportunities reduced, and professional employees might suffer reduced employment opportunities as employers cut professional positions to absorb the increased wages paid to low-skill employees. Further, the market rate theory asserts that in general, the wages paid to employees are fair because they reflect the value that employees create for society.

The Argument for a Living Wage

While opponents of the living wage make a compelling argument, a strong case for providing employees with a living wage is also supported by business owners and economists. The previously considered case of Wal-Mart demonstrates how even modest wage increases can lead to billions of dollars in payroll increases for large-scale retailers. However, Costco serves as a counterexample of how businesses can use equitable wages to their advantage. In a report on Costco’s business practices, Albert Erisman and David Gill note that the company is distinct from its competitors because it voluntarily chooses to pay employees above the market rate (Erisman and Gill 7). The key value of the company’s policy is that it also rewards workers for remaining loyal to the company. According to figures, a Costco cashier who possesses at least four years of experience can potentially earn $40,000 per year on a Costco wage (7). As the success of Costco demonstrates, providing higher wages to low-skill employees does not necessarily have to undermine profitability.

In their review of the company, Erisman and Gill also interviewed CEO Jim Sinegal to gain insight into his rationale for providing living wages to all employees. According to Sinegal’s comments, he determined that providing a living wage could complement the company’s fiduciary responsibilities. Specifically, Sinegal noted that the company rewarded shareholders over the past years by demonstrating significant, yet managed, growth while providing employees with appropriate compensation (8). The critical attribute that makes Costco different from many competitors is that the company seeks stable growth over rapid growth (8). Sinegal’s comments also demonstrate the perspective that maintaining the ability to pay suitable wages to employees while expanding should also be regarded as a matter of sustainability.

Yet, while Sinegal makes a compelling case that businesses should reconsider their plans for expansion if it comes at the expense of taking care of their employees, it still confirms the view that businesses must sacrifice in order to increase employee wages. However, an understanding of motivational theory reveals that compensation can play a role in boosting company performance. As authors Chris Harris and Brian H. Kleiner explain, compensation is a critical component of motivation. As they identify, Maslow’s hierarchy of needs, a leading psychological theory on motivation, asserts that the base needs of individuals must be met before they can begin to fulfill their social needs (Harris and Kleiner 1). Further, according to Herzberg's two-factor theory, employees must take care of maintenance factors before they can effectively adopt motivational factors that boost employee morale (1). As both theories assess compensation is foundational to the working environment that employers create for employees.

Through the theoretical lenses provided by Maslow and Herzberg, the importance of compensation from a human resources perspective can be examined. A low-wage employee who cannot sustain their wages above the poverty level might have difficulty affording rent, food, medical expenses, or other necessities. As a result, the individual will be focused on fulfilling the basic level of Maslow’s hierarchy of needs. Thus, attempting to encourage the employee to focus on the wider needs of the organization might fall short.

Similarly, Herzberg assesses that compensation is a maintenance factor that is distinct from motivational tools. While increasing compensation does not necessarily increase motivation, it must be kept at a reasonable level so that employees will be receptive to motivational factors. Because morale and motivation also impact productivity, compensation can be seen as a method of enhancing profitability. Thus, from this perspective, there are potential net benefits to increasing the compensation of low-skill employees that outweighs the initial payroll increases.

In addition to the benefits that providing a living wage can bring to employees, research also suggests that the societal benefits counter the alleged detriments. As it was previously discussed, economists generally believe that wage floors have a negative impact on the economy by reducing employment for all workers. However, conflicting literature asserts that supporting a living wage improves the economy by improving employee conditions. As researchers Robert Buchele and Jens Christiansen confirm a study of the seven largest capitalist countries in the world demonstrated that there is a positive relationship between improved wages and working conditions and worker productivity (Buchele and Christiansen 32). The implications of the research are twofold. First, it confirms the theories that support the role of compensation in boosting employee motivation. Second, it demonstrates that government-imposed price floors can create competitive and productive market conditions.

Yet, while economists can dispute the exact economic ramifications of living wage increases, the ethical considerations are the most compelling arguments for the living wage. As Deborah Figart establishes in her treatment of the living wage movement, the living wage movement has historically received support from religious organizations that believed that wages must reflect the dignity of human beings (801). From this perspective, the labor of the human being possesses a value that is beyond pure mechanistic market calculations. Further, in their article “The Modern Living Wage Movement,” authors Kamal Muilenburg and Gangaram Singh challenge the priorities of business by highlighting that profits rose 64 percent for businesses over the past decade while overall wages paid to employees decreased by 25 percent (Muilenburg and Gargaram 27). From this argument, it extends that even if a payroll increase would cost a company like Wal-Mart billions of dollars, the reality is that those at the top of the organization are profiting disproportionately at the expense of laborers. Thus, choosing to pass the expense on to consumers or cut low-level jobs rather than simply reduce wages at the top of the organization demonstrates misplaced priorities and poor ethics.

Discussion and Conclusion

In consideration of the arguments for and against the living wage, I believe that those who favor the living wage provide the most compelling argument. While research demonstrates that increasing living wages would increase costs significantly for large-scale employers, I believe that the attempt of businesses to turn around and pass these wages on to consumers rather than promote an equitable pay structure across the company evidences a lack of ethics. Another argument that might be presented to my view is that businesses must generate profits in order to meet their fiduciary obligations and complete through expansion. Yet, Costco’s success demonstrates that businesses can be successful while engaging in managed growth. Considering the widespread economic instability that has taken place over the last decades, managed growth in the business sector rather than rapid growth should be the priority of businesses.

Further, those against paying employees a living wage argue that the market value should be used to determine employee wages. However, I agree with the ethical standpoint that this reduces human beings to the mechanics of the market, which also immoral. As the success of many high-wage economies demonstrates, humans prosper when they use their judgment to adjust the market. Finally, because it is the duty of human resource professionals to provide adequate compensation and provide a sound working environment, I believe that human resource professionals must consider how compensation impacts the ability of their employees to meet their basic needs. As motivational theory informs us, employees are better able to make contributions to the organization when they are elevated beyond conditions of poverty. Thus, because it promotes a fair business model, promotes employee productivity, and leads to improved productivity for the economy, organizations should ensure that the wages they provide reflect the standards of a living wage.

Works Cited

Abdulahad, Faraj, and Hany S. Guirguis. "The Living Wage and the Effects of Real Minimum Wages on Part-Time and Teen Employment." Employee Responsibilities and Rights Journal, vol .15, 1, 2003, pp. 1-9.

Buchele, Robert, and Jens Christiansen. "Worker Rights Promote Productivity Growth." Challenge, vol. 38, 5, 1995, p. 32.

Erisman, Albert, and David Gill. “A Long Term Business Perspective in a Short Term World.” Ethix, 2003, pp. 6-9.

Figart, Deborah M. "Ethical Foundations of the Contemporary Living Wage Movement." International Journal of Social Economics, vol. 28, 10-12, 2001, pp. 800-14.

Harris, Chris, and Brian H. Kleiner. “Motivational Practices at America’s Best Managed Companies.” Management Research News, vol. 16, 9-10, 1993, p. 1.

Jacobs, Ken, Dave Graham-Squire, and Stephanie Luce. “Living Wage Policies and Big-Box Retail: How a Higher Wage Standard Would Impact Walmart Workers and Shoppers.” University of California, Berkeley – Center for Labor Research and Education. Apr. 2011.

Muilenburg, Kamal, and Gangaram Singh. "The Modern Living Wage Movement." Compensation and Benefits Review, vol. 39, 1, 2007, pp. 21-28.

Reynolds, David, and Jen Kern. "Labor and the Living-Wage Movement." Working USA, vol. 5, 3, 2002, p. 17.

Schuldt, Robert, Davis Woodall, and Walter E. Block. "Drowning the Poor in Excessive Wages: The Problems of the Minimum Wage Law." Humanomics, vol. 28, 4, 2012, pp. 258-69.